Explaining the Rising Cost of Healthcare
Revisiting Healthcare Swamp of the Middlemen
The healthcare delivery system in the United States is in crisis. Its costs are skyrocketing and distribution is becoming ever poorer. Other countries have their own healthcare issues, and in a few, it has become the topic of everyday news. For example the national health system in Britain, or on the other extreme, the lack of total delivery of medical services in some third world countries like Yemen.
Politics and the government have control over healthcare in one way or the other.
Costs related to healthcare delivery are constantly on the rise. Between 1998 and 2015 the price of medical care services in the US (as measured by the BLS’s CPI for Medical Care Services) increased nearly 93% or more than twice the 45.4% increase in consumer prices in general.
One of the reasons that medical care costs in the US have increased almost twice as much as general consumer prices since 1998 are that a large and increasing share of medical costs are paid by third parties (private health insurance, Medicare, Medicaid, Department of Veterans Affairs, etc.) and only a small and shrinking percentage is paid out-of-pocket by consumers.
According to government data, almost half (47.6%) of health care expenditures in 1960 were paid by consumers out-of-pocket, and by 1990 that share had fallen to 19% and by 2014 to less than 11%. Healthcare costs have risen as the share of third-party payments has risen to almost 90% and the out-of-pocket share approaches 10%. Consumers of health care have no incentive to monitor prices and are cost-conscious buyers of medical services when they only pay 10% themselves, and the incentives of medical care providers to hold costs down are greatly reduced knowing that their customers don't price sensitive.
How would the market for medical services operate differently if consumers were paying out-of-pocket for medical procedures in a competitive market?
Well, we can look to the $13.5 billion US market for elective cosmetic surgery for some answers. In every year since 1997, the American Society for Aesthetic Plastic Surgery has issued an annual report on cosmetic procedures in the US (both surgical and nonsurgical) that includes the number of procedures, the average cost per procedure (starting in 1998), the total spending per procedure, and the age and gender distribution for each procedure and for all procedures. (Here is a link to the press release for the 2015 report, and the full report is available here).
The big picture is that over the past few decades the healthcare delivery costs have increased significantly with an inverse correlation between the percentages of out of pocket costs for patients, which in turn directly correlates with the attitude of patients towards third-party reimbursement. Over that period of time, insurance industry experts fed their coverage option from acute only care to full primary care and preventive medicine options. Today the insurance coverage and third-party reimbursement for healthcare services have become the norm so that American and many in many countries around the world people have developed the belief that healthcare can only be paid by the third parties and all they focus on is the premium and deductibles vs actual cost of the services being delivered, leaving the middleman to deal with the other end of the bargain. This has led to the progressively blurring of third party transparency hence profitability bias and ever-rising cost.
